Budgetary Control in Unpredictable and Dynamic Environments Essay

  • Length: 6 pages
  • Sources: 4
  • Subject: Business - Management
  • Type: Essay
  • Paper: #25225183

Excerpt from Essay :

Budgetary Control in Unpredictable and Dynamic Environments

The Effectiveness of Budgetary Control in unpredictable and Dynamic Environments

One challenge that has affected a number of economies today is the existence of unstable and dynamic environments. The challenge has made many of the leaders and managers adopt budgetary control measures. Companies often profit from their ability to predict their future financial performance with the use of the existing and previous market conditions. However, strategic managers often encounter challenges when their predictions on a company's financial performance are improbable. The adoption of budgetary control often ensures that economies and businesses can survive in the changing and unpredictable economic times. This study will look into the issues of implementing budgetary controls when scenarios prompting such actions arise. The study will also provide some alternative solutions that can be adopted as contingency measures when planning systems fail.

Business success depends on the choices that business leaders make when it comes to budgetary controls. Unpredictable and dynamic economic environments are accompanied by many challenges of scarce resources and other associated risks. The system ensures that the businesses minimize the risk of incurring losses and possible collapse of its operations. This is informed by the knowledge that such environments are full of business risks that may lead to business stagnation. Fundamental strategies of business stability ensure that the necessary controls are always established (Valenti, 2004).

The Effectiveness of Budgetary Control in unpredictable and Dynamic Environments

The effectiveness of budgetary control in the unstable and dynamic environments may be understood in terms of fundamental capabilities. First, budgetary control is effective in such environments by ensuring that expenditures are kept within the established budget limits. It ensures that all the expenditures of the business are maintained within the authorized budget that is made by the business. Businesses can minimize the risks associated with high costs that may accrue due changes the market by limiting the expenditures associated with the running of their operations.

In addition, budgetary controls may also be found effective in the unstable and dynamic environments when they offer real-time check on the transactions taking place from time to time. Business leaders use budgetary controls to ensure that there is an effective real-time check of business transactions especially in the management of inventories. This enables various organizations to minimize the wastes and losses arising from different transactions conducted within the business (McKinsey, 2011).

Budgetary controls are also useful for business leaders can manage the existing fund balances that can be risky for the business. Through automatic accumulation and control of the available fund balances, a business can account for all the money used. All business transactions involving cash expenses are accounted during the unstable economic seasons. Such a practice leads to high levels of accuracy in managing the expenditures and balances within the budgetary allocation framework. The ultimate benefit is that a business can use its funds optimally by minimizing wastes that occur via extravagant expenditures (Valenti, 2004).

The system also ensures that managers embrace fundamental guidelines that are useful in preventing losses, especially from common business mistakes and errors. With budgetary controls, clear guidelines are established and are useful when the economic seasons are unforeseen. Many organizations often have the challenge of accounting for the revenues and costs during unstable economic seasons. In fact, a small error in accounting for the expenditures may create significant losses to the business. Therefore, budgetary control mechanisms are fully implemented to ensure that minimal errors in allocating funds for the diverse expenditures are recorded. While minimizing the errors recorded on expenditures, business organizations can make savings that act as a security against a possible collapse (Valenti, 2004).

Budgetary control is also an effective tool in promoting the achievement of the projected performance resulting in the entire performance and competence of a business. While developing a well-planned budgetary control system, leaders foster the organization's capacity of implementing the budget, monitoring progresses, and implementing the established controls. Such measures ensure that the proposed financial targets are realized with limited obstacles. The company should be able to achieve this even when the market dynamics are not as expected (unpredictable, unforeseen, and risky markets). While minimizing the risks, business leaders can adopt decisions that will allow them to operate within the budgetary limits hence the realization of the budgeted performance (Marini, 2003).

Planned systems are also effective because they allow businesses to gather critical information essential for predicting the company's future performance. With an efficient budgetary control, key information on controls may be collected to foster the proper management of funds. This may not be achieved without the availability of the critical information. During the unstable and dynamic economic seasons, it is necessary for business leaders collect the necessary information that will facilitate the establishment effective controls (McKinsey, 2011).

A budgetary control is also is a platform where a business can improve its investments and capacity to produce wealth. Through this, business leaders can focus on improving investments at unpredictable economic times. With the help of budgetary controls, business leaders can minimize expenditures and take the savings into promising investments that will keep the business rolling. Besides, strategies may be undertaken on minimizing expenditure whilst identifying the best ways to channel cash to credible investments. This will limit the level of risks that the businesses face in seasons with the unstable market trends.

Besides, the effectiveness of budgetary control may be understood from a goal perspective. In this context, developing an efficient budgetary control system creates room for integrating the personnel efforts and channeling them towards a common goal. In fact, all activities can be brought together and coordinated so that organization's goals like boosting production and minimizing cost are achieved. However, this is not possible without the efficient budgetary control system. Indeed, this strategy allows the organization to redirect all efforts towards the realization of the set goals and objectives. This is important because it is very necessary to bring workers together to the common goal in the unstable and dynamic environments regardless of the changes in the market (Hofstede, 2012).

Budgetary controls are also useful in providing platforms to correct possible deviations of the money spent on a given project. Any deviations in accounting expenditures to businesses operating in unstable environments may be very costly. When expenditures exceed the allotted budget, it is a negative indicator of success to the organization. With an effective control system, the management will be more attentive resolving the risks of loosing funds through extravagant spending. When an organization is subjected to the unstable and dynamic environment, extravagance may be too costly for the organization and predisposes it to possible collapse. Budgetary controls are effective in providing justified measurements of performance. The challenge facing businesses in unpredictable environments is the difficulty in foretelling its success. With an effective control, a just way of measuring the financial performance of the business may be established. This will provide a financial foresight to organizational leaders since it is an important component of strategic planning (Marini, 2003).

In addition, budgetary control in the dynamic and unstable environments is effective in allowing management to learn from the experience. Unstable environments always create fear among business leaders to take proactive moves on investments that may sometimes be riskier. However, through budgetary controls, business managers can focus on the experience that the business has gone through and use it to make key decisions to build the business. Budgetary controls are useful when making critical decisions during unpredictable circumstances. This adds value to the sustainability of the businesses operating under such environments.

Budgetary controls allow business organizations to focus on their future operations under difficult and unpredictable environments. This is premised on the fact that budgets are part of the planning process during the tough times. When businesses are facing unstable environments, business leaders often connect with the future operations of the business by examining their trends. In addition, well-developed budgetary controls allow organizations to reorganize the future operations of the business in such a way to minimize future losses/risks in the event that the environment gets worse (Hofstede, 2012). In addition, a budgetary control acts as a communication tool for the management of the organization. Setting up an effective budgetary control communicates to the organization on the financial state of the company. It allows the management of the organization to see their past financial performance in the lens of the current and future market uncertainties. By examining the past records, then business leader may minimize the future risks accrued to extravagant or misappropriated expenditures. Business leaders can know the state of the business and strategies that must be undertaken to ensure the business stands with the help of the control system (McKinsey, 2011).

Potential solutions used when planning-based systems fail

An organization cannot escape the entire problem arising from the unstable business environment. This often destabilizes the budgetary control measures, which have been adopted by an organization. Under such circumstances, the planning-based system may not work; the organization encountering the challenge must have…

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